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Is Holistic Planning The Answer To The Retirement Crisis?

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Liliya Jones may not be certain of the answers as she looks for a new way to serve clients while the financial and insurance industries shift to a more client-centric approach. But she knows what she does not want for her Portland, Ore., financial firm.

And that is doing business as usual, where the commission-based world focuses on product and the fee-based side focuses on assets. What about the people who have broader needs beyond a single product but do not have the assets to manage? Is it about the client or about the money?

As the operations director at Modernist Financial, Jones sees that vast slices of the population don’t have the $1 million in assets that her firm requires. And she is in the right firm to do something about it.

A prominent slogan greets visitors to Modernist’s stark red and black homepage: “Believe in plenty. Believe in enough.” The first sentence might be familiar to advisors — the second, not so much. It’s a new direction toward balance for clients, and for advisors.

Many agents and advisors are looking for that balance as the insurance and financial industries find their way in a more fiduciary-focused world. Especially now as more Americans age into an uncertain retirement.

As reported in the National Institute on Retirement Security’s September 2018 report: “Retirement in America: Out of Reach for Working Americans,” more than 59 percent of households (100 million people) do not have any type of retirement account assets, whether in an employee-sponsored 401(k) type plan or an individual retirement account.

A new type of advisor is emerging, shaking up traditional, outdated approaches and placing greater emphasis on getting ordinary workers retirement-ready.

This new breed breaks the industry mold, helping it to shed its self-serving stigma. “We do some volunteer work for people who are underserved or just starting out in their career, so we are serving people whose situation doesn’t make sense for them to hire an advisor. But, with a little bit of a boost and a little bit of help, they could be set up on a really nice path,” Jones said. “Our long-term goal is to find a way to serve the middle that’s left behind.”

Barrier To Entry

Fee-based advisors have been touted as superior to advisors and firms who work on a commission-based model. However, most fee-based advisors still have minimum income or asset requirements that must be met before they will take on a client.

“Our minimum is a million,” Jones said. While it isn’t evocative of what the financial picture looks like for millions of everyday Americans, TD Ameritrade’s FA Insight Study found that the median client has around $1 million of assets under management, making Jones’ minimum AUM average by industry standards.

Some advisors choose to work with only high-net-worth clients or ultra-high-net-worth clients, leaving middle-income Americans with significantly lower incomes more vulnerable to being ill-prepared for retirement. This is a trend that Jones would like to see change.

“We are very aware that this is a high-net-worth demographic and that it is not touching a lot of other people who also need help. So the long-term goal for the firm is to be able to serve the whole income spectrum,” Jones said.

Individuals with lower incomes are much less likely to be prepared for retirement than those with higher incomes, according to a 2016 Financial Industry Regulatory Authority study, “Financial Capability in the United States.” Only 18 percent of respondents with annual incomes of less than $25,000 have a retirement account, compared to 87 percent with $75,000 or more in annual income.  

Additionally, gaining financial literacy elsewhere isn’t readily accessible to a large portion of the population. A FINRA survey concluded that only 31 percent of respondents have been offered financial education at school, college or their workplace.

This hurdle to financial literacy and advice led to the rise of a new, modern financial planning model called holistic planning or financial life planning.

Holistic planning emphasizes the long-term, big picture, by requiring that advisors spend more time understanding the individual and unique financial situations clients face as opposed to traditional advisory models, which take information such as a client’s age and income and plug it into a financial model. Holistic planning is more accessible to individuals in lower income brackets. Holistic advisors ask clients strategic questions to help them visualize their current financial situation and map out a strategy to get it where they want it to be.

Change Is Difficult

At Modernist Financial, this transition is already in sight. “We have our eye on that down the line,” Jones said. “Right now, we do pro bono work. So we’ve put together a workshop that is personal finance and cash flow-themed that we do for nonprofits here in town.”

The team at Modernist Financial is using those classes to refine their curriculum in the hopes that it could become a group class or paid seminar for people in the middle of the income spectrum.

Ashley Foster is farther down the road with his practice in Houston. He started his career in the insurance world, climbing rapidly at New York Life. But he was dogged by the feeling that clients were being lost in the process. That is when he decided to make his leap into the fee-only financial world.

Progressives such as Foster say change is coming to the financial services industry as more and more advisors embrace the holistic approach, but it’s slow.

“Very few do serve these groups because the industry is still geared toward serving that high-net-worth client. Especially in the financial advisory business — change happens very slowly in any business, but especially in ours,” said Foster, who founded Nxt:Gen Financial Planning. “You’re starting to see more of that monthly retainer-ish fee-for-service models starting to take place. But most traditional firms choose to work with high-net-worth clients because they are more geared toward the product sales side of the business.”

For Foster, the changeover was gradual and followed his own changing values.

He began his career as a financial advisor more than 10 years ago with a Fortune 100 life insurance company. Those first few years were financially challenging, he said, and he worked hard to keep his practice afloat during the Great Recession.

“Even though my income was variable, expenses such as my car note, student loans and rent were fixed. I had to be creative in handling my finances in order to stay ahead of my expenses,” Foster said. “Mastering financial basics and learning how to employ smart financial strategies got me through the tough times.”

But his success was not satisfying.  As his practice grew, he found his career becoming less and less fulfilling.

“I was helping the wealthy keep more of their money, yet my friends were still recovering from the effects of the Great Recession. I was in a more sales-oriented role, needing to hit sales targets to satisfy the demands of my contract and management.”

In 2014, Foster enrolled in Rice University’s Certified Financial Planner course, an experience he said changed his perception of financial planning.

“As I went through the course, I learned how financial planning is not about selling products, but of taking a client through a process to discover needs, wants and values in order to create a road map for their future. I found value in this and began to transition my practice into focusing more on holistic planning,” Foster said.

“It wasn’t until I started running into other young professionals who needed financial advice that I realized I was unable to effectively deliver it within a traditional financial advisory firm.  This is why I created Nxt:Gen Financial Planning. I am an independent private practice that focuses on holistic planning for young professionals. I am also a fee-only financial planner, which means I do not sell products, earn commissions nor receive third-party compensation. As a fee-only planner, I am charged with being a fiduciary to my clients.”

For advisors looking to transition, Foster said it requires an assured level of commitment.

“I saw the conditions in the market beginning to change. In reality, this was the way of the future and I wanted to get ahead of the curve,” Foster said, adding that it involved a shift in thinking. “Because it requires a big shift in the way you’ll be doing business.”

The picture looks different for each advisor, but that doesn’t mean transitioning to a fee-only compensation model is impossible. For advisors who are commission-based and have developed a clientele from product sales, Foster suggests taking the smaller step of becoming a fee-based business model. In this way, advisors aren’t starting from scratch to develop a client base and the bottom line isn’t as severely impacted during the transition period. From there, advisors can choose either to stay in the fee-based model or continue the transition to fee-only, dropping all product-based and commission-based clients.

“If your current business model isn’t going to support that shift, it’s just not worth it,” Foster said. “Ask whether your business model can support doing this.”

Foster leapt with both feet into the fee-only world, handing off his product-based clients to his partner so that he would be able to act as a fiduciary moving forward. 

“But if you have a lot of insurance business that is paying you a lot of trails and things like that, going fee-only may not be something for you,” Foster said. “You may want to go fee-based.”

Untapped Potential 

Generation X and millennials are included in the groups not adequately prepared for retirement.For these youthful groups, retirement is still a long way off, but other financial concerns could affect their retirement savings without the help of a planner. 

For Foster, it was a no-brainer that he wanted to serve younger clients.

“They are not being served in all reality,” Foster said, explaining that because of their financial situations, they are not ideal clients for traditional advisors. 

“There’s really nobody to turn to in the fee-only space, traditionally. On the other end of the spectrum, you have your typical — I’ll just call them financial sales people. You have a conversation with that individual. Typically, the conversation focuses on products, you pay for product if there’s a need and then there’s no real holistic look at your situation,” Foster said. 

“So, the younger client doesn’t have the option of going to a fee-only professional because a fee-only advisor manages millions of dollars, causing the barrier to entry to be too high. Your traditional financial advisor/insurance agent is really the only option that they have if they want to work with somebody face-to-face. Typically, those agents do not take a look at a person’s situation holistically because they’re not compensated for that; they’re compensated by selling product. I can understand that because I did it for 10 years.”

Three in four consumers ages 35-44 say they would be very interested in a financial product providing a greater amount of guaranteed lifetime income than a non-guaranteed alternative, even if they were unable to access the principal investment, according to the National Institute on Retirement Security’s February 2018 report, “Millennials and Retirement: Already Falling Short.” 

Yet, the same report found that 66 percent of millennials have nothing saved for retirement.

To combat this shortage, several states have implemented state-run retirement plans. Most operate in a voluntary auto-IRA format, but several models have popped up as state-run plans have become more popular. 

However, this solution isn’t popular with everyone. The National Association of Insurance and Financial Advisors believes using state funds to better educate young workers about retirement is a much better use of resources. 

“NAIFA believes limited state-government resources would be better used educating workers about the need to save for retirement and helping them take advantage of the abundant private-sector options already available. Several states have passed legislation to create marketplaces to serve as resources for employers and workers seeking information about retirement planning and connecting them with private-market retirement plan providers,” said Kevin Mayeux, NAIFA CEO. 

Retirement Crisis 2.0

The current retirement crisis is largely due to lack of adequate savings for a multitude of reasons, including but not limited to access to planning, consumer debt and financial education. However, the next retirement crisis could be caused by something more ominous — student loan debt. 

ValuePenguin’s “Average Student Loan Debt in America: 2018 Facts & Figures” says the total outstanding student debt in 2017 was a $1.4 trillion. Of that $1.4 trillion, those between the ages of 30 and 39 hold the largest amount of outstanding student debt at $461 billion. That breaks down to roughly $33,000 per person. 

The Center for Retirement Research at Boston College’s June 2018 study “Do Young Adults With Student Debt Save Less For Retirement?” uncovered that college graduates with student loan debt accumulate 50 percent less retirement wealth by age 30, compared to those without loans. 

Foster said, “Here’s someone who has $150,000 of student debt. They’re not even thinking that they should ever retire. Because they have this massive ball and chain that follows them.” 

Seniors Are Struggling, Too

At one time, individuals depended on pension plans for retirement savings. Today, pensions are hard to come by and Americans are becoming more dependent on their assets to generate sufficient retirement income. 

Many Americans now rely on other retirement savings accounts, such as 401(k)s and IRAs. Now left to manage retirement on their own, individuals are realizing they saved too little after it’s too late. 

Citing these struggles and those of his younger clients, Foster said, “I see the need for holistic planning.” 

As the demographics shift, the importance of having adequate retirement income will be paramount in alleviating the pressure on social programs such as Social Security to care for those who have not saved nearly enough for a sustainable retirement. 

But, like young adults, seniors with little to no assets and a fixed income face a barrier to entry to gain access to informative financial advice. 

Mitchell Kraus, a financial planner from Santa Monica, Calif., volunteers his services to a local organization for two hours each month. He sits with retirees and those approaching retirement age, reviewing their financial plans or pointing them in the right direction to be in a better position as retirement nears. 

The concerns he hears from seniors reinforces the significance of financial planning on alleviating those fears, Kraus said. “With that population, what I hear is, ‘How am I going to make the few dollars that I’ve saved last the rest of my life?” Kraus said. “There’s generally not enough savings.’” 

Agreeing with Kraus’ assessment, Jones asked “Where can we address some of the need? “We know we have a retirement crisis — that’s what the data shows — so how do we try and examine this in the context of the economic system that we have and try to solve it from there?”

 “I think it could be interesting to have more of a culture that expects a certain amount of pro bono work. I think having a little bit more of that expectation imbedded in the financial industry would be nice.”

According to Jones, the industry may need to do some soul-searching to find a solution to the retirement savings gap. She proposes instituting and accepting a fiduciary rule as an industry — something the industry has lobbied against. She also said lowering the Social Security eligibility age, increasing access to state-sponsored retirement plans and raising the minimum wage all could help close the gap. 

“If we say as the financial services industry that we are interested in people’s financial well-being, those are the things that would increase that,” Jones said. “I think we can think a little bit bigger.”

Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @INNCassieM. [email protected].


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